The Financial Accounts

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Presentation transcript:

The Financial Accounts The Profit and Loss Account

The Profit and Loss Account Is a record of the revenues and costs of a business over a period such as a year. It is an HISTORICAL RECORD. Making profit is one of the most significant objectives for business organisations. The profit and loss account is therefore a crucial document when judging the success of a business. Who might use the P&L account? What for?

The P&L account may be used by… Management Shareholders Tax authorities Suppliers Potential investors

Profit Gross profit = Revenue – cost of sales (variable costs) Net profit = Gross profit – operating costs (fixed costs) The P&L account is divided into three sections: trading account...(gross profit) P&L account...(net profit) appropriation account...(distribution)

Trading Account Sales turnover (A) Cost of sales (B) Opening stock i Add purchases ii Less closing stock iii Gross profit (C) A-B

Profit & Loss Account Gross profit (C) A-B Expenses (overheads) Water Wages Heating Insurance Net profit (E) C-D

A Simple Profit & Loss Account Sales turnover 1000 Cost of sales Opening stock 50 Add purchases 400 Less closing stock 40 Gross profit _?_ Overheads 300 Net profit _?_ Tax 90 Dividends 110 Retained profit _?_ Trading Account Profit and Loss Account Appropriation Account

A Simple Profit & Loss Account Sales turnover 1000 Cost of sales Opening stock 50 Add purchases 400 Less closing stock 40 490 Gross profit 510 Operating costs 300 Net profit 210 Tax 90 Dividends 110 Retained PROFIT 10